Should the International Investment Agreement be Given a Chance?: The Breakdown of Negotiations at WTO's Ministerial Conference in Cancun and LDCs Which Were Left Behind

Fellow, RIETI

In mid-September, negotiations broke down at the World Trade Organization's (WTO) ministerial conference in Cancun, which had been the site for interim assessment of the Doha Development Agenda. As with the failure at the 1999 Seattle meeting, the ministerial meeting in Cancun failed to adopt a Ministerial Declaration to serve as a guide for future negotiations, leaving the new round of WTO negotiations facing a loss of momentum.

It is true that no effective solution is apparent for the conflict between developed and developing nations concerning agricultural subsidies and market access. However, is their tactic of holding hostage the Singapore issues, which include the investment agreement the WTO was prepared to take on, truly beneficial to the developing countries themselves? Is this not a time when developing and developed nations alike should sincerely reconsider the importance of a WTO agreement on investment?

The advancement of international investment, and the WTO as the final stronghold for concluding a comprehensive international investment agreement

Together with trade, international investment is one of the driving forces propelling the international economy. A glance at the rise in international direct investment figures in recent years plainly shows this remarkable growth. In just over ten years, the worldwide stock of international direct investment has nearly quadrupled. In terms of the flow of funds as well, the scale of the annual amount of funds employed in international direct investment is now approximately three times what it was ten years ago. Moreover, the total amount of sales conducted by businesses through their overseas operations far exceeds the worldwide total amount of exports of goods and services - as much as 2.5 times higher. In terms of employment as well, 53 million people are employed by foreign firms. It is hard to imagine the gears of the world economy, now advancing toward a borderless state, shifting into reverse in the future. However, despite the rapid increase in the importance of international investment and overseas business activities, numerous efforts to conclude an international investment agreement that would regulate these have failed at the United Nations and the Organisation for Economic Cooperation and Development (OECD). Now, the site of the attempt to achieve such an international investment agreement has shifted to the WTO.

The network of Bilateral Investment Treaties is insufficient

The argument has been made that since a network of numerous Bilateral Investment Treaties (BITs) has been achieved around the world, an international investment agreement is unnecessary. In fact, as of the end of 2002 as many as 2,181 BITs were in place around the world. However, the network of BITs is heavily one-sided. Developing nations that have the power to conclude BITs tend to be those that show future promise and have already received large investments of funds from developed nations. Examples include China, which has concluded 107 BITs, and India, which has concluded 81. However, the 49 Least Developed Countries (LDCs), which are the poorest nations, had ratified no more than 2.6 BITs on average (as of January 2000). Most of these were merely BITs concluded as necessary conditions for receiving official development assistance (ODA) from former colonial powers or BITs concluded with neighboring countries. Despite the importance to economic development of the effective utilization of funds from international investment, the network of BITs is far from fulfilling the role of mediator between these LDCs and the world economy.

Accumulation of funds from international investment and the framework for liberalization of investment

Furthermore, the recipients of funds from international investment and the frameworks that can be used for liberalization of investment are already heavily one-sided. Although over 90% of foreign direct investment funds are provided by developed nations, 70% of these are also received by them. Why is so much investment made from one developed nation to another? This seems to be the result of an environment that makes mutual investment easy. Among other factors, this is the effect of liberalization frameworks such as OECD's Code of Liberalization of Capital Movements and Code of Liberalization of Current Invisible Operations that have developed steadily from an extremely early stage in 1961, as well as the success of efforts such as bilateral discussions on regulatory reforms.

In addition, although the remaining 30% of investment funds are directed to developing nations, 95% of this portion is concentrated in the top 30 nations. No more than 2% flows to the 49 LDCs. The top developing nations in terms of receiving funds from foreign investment are the major players that belong to regional investment liberalization frameworks such as APEC, MERCOSUR, AFTA, NAFTA, and the free trade agreements (FTAs) with the EU. While the amount of funds from private foreign investment flowing to developing nations has already grown to more than ten times the number of ODA funds, for LDCs, the amount of ODA funds still exceeds the sum of funds from private foreign investment.

Of these LDCs, 42 nations are already either WTO members or observers. If a framework for investment liberalization can be set up in the WTO, these LDCs, which have been estranged from the network of BITs and from regional liberalization frameworks, would actually benefit most. Even if they should not expect the conclusion of an investment agreement to bring about an immediate and major increase in the flow of funds, these countries can achieve strong footholds for improving their own investment environments.

What are the obstacles to achieving an investment agreement?

The history of negotiations over an international investment agreement is also the history of confrontations between developing and developed nations. As shown by the resolution of the General Assembly on the Declaration on the Establishment of a New International Economic Order in 1974, the United Nations has endeavored to construct an international economic system beneficial to developing countries. Although the U.N. Code of Conduct on Transnational Corporations drafted in 1983 was an attempt at a comprehensive international investment agreement, negotiations were abandoned in 1990 after the gap could not be bridged between developing and developed nations. The inability to break free from this confrontational paradigm is also a factor obstructing the progress of negotiations.

Although the OECD's Multilateral Agreement on Investment (MAI) was planned for later signature by developing nations, it was criticized strongly by NGOs and developing countries, which said it did not sufficiently protect laborers and the environment. At the same time, differences in opinion continued even in negotiations among the OECD countries concerning issues such as the balance between each nation regarding the handling of exceptions for national treatment and most-favored-nation treatment, as well as the issue of cultural exceptions, the handling of regional economic integration and subnational issues, and dispute settlement. Negotiations on the MAI were discontinued in 1998.

Dispute resolution is an issue bound to be handled carefully by countries taking the position of the Calvo principle, which places priority on the domestic administration of justice over an international dispute resolution mechanism. Although the International Centre for Settlement of Investment Disputes (ICSID) was established in 1965 under the auspices of the World Bank, based on the Convention on the Settlement of Investment Disputes between States and Nationals of Other States, Latin American states and other nations opposed an agreement based on this principle. Even now, Brazil, Mexico, and India have still not agreed.

Furthermore, in the Uruguay Round the Agreement on Trade-Related Investment Measures (TRIMs Agreement), which prohibits performance requirements involving quantitative restrictions, was adopted. Concerning inconsistencies with this agreement, the domestic automobile development policies of Brazil, Indonesia, India, and the Philippines have been brought forward or made subject to consultation for dispute settlement. Also, developing countries were not easily able to attain extensions of the period for removing measures that do not comply with the agreement. In response to these incidents, developing countries remain concerned that adoption of a new agreement would impede their freedom to implement their own domestic development policies.

The seeking of solutions to these points of contention that have arisen in past negotiations, in order to construct a multilateral investment liberalization framework, is not an easy road for the WTO. However, there is no arena for such negotiations to take place in other than the WTO, which has already spent seven years in consideration of the matter.

The mutual commitment of both developing and developed nations is essential

As a result of the breakdown of negotiations at the ministerial conference in Cancun, it is feared that the concerns of the United States, Europe, and Japan will shift to the subjects of FTAA, the EU expansion, and conclusion of economic partnership agreements. Ways need to be sought for all members, including the LDCs, to enjoy the benefits of a multilateral agreement on international investment that incorporates the goals of the Doha Development Agenda. The developed nations should not serve as proxies for the benefit of multinational enterprises. Instead, they should advance negotiations from the standpoint that achieving fairness and transparency will serve the mid- to long-term interests of their own citizens. Isn't it time for developing nations as well to reconsider the significance of concluding an international investment agreement under the auspices of the WTO? Whether the lifeline for achieving multilateral investment restrictions can be protected or not depends on the mutual commitment of both developing and developed nations.

November 4, 2003

November 4, 2003